Tag Archives: hedge fund exemption

California Extends IA Exemption for Hedge Fund Managers

Will Wait for SEC Final Registration Regulations to Propose New Rules

California currently has an exemption from the registration requirements for certain fund managers with more than $25M of AUM (Rule 260.204.9).  Back in March California requested input from the investment management community on how they might change the registration requirements when the SEC finalizes its IA registration rules as a result of the Dodd-Frank act.  At that time it was expected that the SEC would finalize its IA registration rules in time for managers to register before the July 21, 2011 registration deadline.  However, the SEC subsequently indicated that it would likely extend the registration deadline until the first quarter of 2012.  From this story by IA Watch, it looks like the Division of Investment Management is moving closer to officially moving the registration deadline to next year.

Because of the uncertaintly of rulemaking at the federal level, the states are left in limbo as to how to proceed with respect to fund managers who may or may not fit under certain exemptions after the federal laws

become effective (even if new federal rules are not yet effective).  California is addressing this exact scenario in a letter it addressed the investment management community on May 13, 2011.  The letter states:

“some uncertainty may exist about the need to become registered after July 21, 2011, for California IAs who are currently unregistered, in reliace on the existing exemption set forth in Rule 260.204.9.”

The letter goes on to state:

“The Department will soon issue emergency regulations to address this potential uncertainty.  These emergency regulations will amend Rule 260.204.9, but have the effect of preserving the status quo.  Therefore, California IAs who currently rely on the exemption from registration for private advisers, will be able to continue to rely on that exemption until such time as the Deparment adopts final rules related to private fund advisers.”

This is good news for current managers located in California and relying on the exemption from registration in California.  We believe that other states (such as Connecticut which has a similar exemption) will soon follow California and release emergency regulations to deal with issues related to the failure of the SEC to finalize the IA registration regulations.  Until the SEC does issue final regulations, it would seem that states would (or probably should) stop proposing changes to state regulations (see previous post on Massachusetts proposed changes).


Cole-Frieman & Mallon LLP is a law firm focused on the investment management industry.  The firm provides investment adviser registration services to hedge funds and other investment managers.  Bart Mallon can be reached directly at 415-868-5345.


California Requests Input on IA Exemption Changes

Seeks to Raise IA Exemption Threshold to $100MM AUM

In an Invitation for Comments released today, California officially seeks comments to change its rules with respect to hedge fund managers and a certain exemption from investment adviser registration.  California currently exempts from registration those investment advisers with a place of business in California and more than $25MM of AUM (please see our post on the California IA exemption).  California may, however, increase the asset threshold for the exemption because of the changes under the Dodd-Frank Act.

Prior to Dodd-Frank, hedge fund managers could not register with the SEC unless they had $25MM of AUM.  Now, the threshold will be $100MM of AUM.  Accordingly, some states are proposing to amend current laws so they reflect the changes at the federal level.  The invitation for comments seems to be based on a recent NASAA proposed hedge fund model rule which would require all non-SEC registered hedge fund managers (to Section 3(c)(1) funds) to register with the state securities commission.   The proposed model rule was a natural step for NASAA to take considering that the Dodd-Frank Act did, with respect to some states, leave a regulatory gap.  Connecticut is another state which has an exemption for managers with more than $25MM of AUM (please see our post on the Connecticut IA exemption).

California Invitation

California provided the following as a reason for the invitation:

As a result of Dodd-Frank, on July  21, 2011, Section  260.204.9 will no longer provide an exemption from California licensing requirements.  In anticipation of these changes, the California Corporations Commissioner will be amending Section 260.204.9 to reflect the changes in the corresponding federal rules.  The Commissioner seeks input on the issue of how best to regulate advisers to alternative investment vehicles, while balancing the regulatory burden on such advisers, with any corresponding investor protections issues.

The following are the items which California asks interested parties to discuss:

1.  To avoid the “retailization” of private alternative investment funds, should the exemption apply exclusively to advisers to Section 3(c)(7) funds (i.e., not to Section 3(c)(1) funds)?
2.  Should all persons investing in a Section 3(c)(1) fund be required to be qualified clients? If so, should the Department issue an order that “grandfathers” Section 3(c)(1) funds organized prior to July 21, 2010?
3. Should the proposed statutory disqualification provisions be expanded to include additional factors?
4.  Should the proposed asset under management threshold (AUM) be a different amount than that set forth in the proposed rule (i.e. $100 million)?  If so, what is the basis for a different threshold?
5.  Are there criteria other than AUM that the Commissioner should consider to determine whether an adviser should be exempt (e.g., the fund is subject to an annual audit)?
6.  Should the Department’s definition of venture capital company/fund conform to the proposed SEC definition?
7.  Should the Department adopt the North American Securities Administrators Association (NASAA) proposed model rule for an exemption for Private Fund Advisers?

What this means

Right now this does not mean anything.  The division will take comments into consideration when they begin to draft the proposed amendment to the current hedge fund registration exemption.  After the proposed amendment is drafted, there will be a public comment period prior to any new regulation being officially adopted.  This means that interested parties will have the ability to have their comments heard now and after a proposed rule has been announced.  Comments on this particular release are due by March 28, 2011.


Bart Mallon is an attorney who works with both state and SEC registered fund managers.  His firm, Cole-Frieman & Mallon LLP, routinely provides regulatory and compliance services to registered investment advisers.  He can be reached directly at 415-868-5345.

Virginia Hedge Fund Law

Starting a hedge fund in Virginia

Those hedge fund managers who are starting a hedge fund in Virginia can potentially fit within an exemption from the Virginia investment advisor registration rules.  Like many states which follow the Uniform Securities Act, investment advisors with a place of business in Virginia must register with the securities division (see FAQs below on Virginia investment advisor registration).

However, managers who have funds which start out with more than $5 million in assets, and which are exempt from investment advisor registration with the SEC, may be able to fit within an exclusion from the definition of the term investment advisor and thus not required to be registered with Virginia.  We provide the statute and analysis below. Continue reading